Ding Cui, Carbon Black Industry Chain Analyst of BAIINFO
Market in Upward Fluctuations in 2021
China’s carbon black market followed a reversed “V” trend during the “13th Five-Year Plan” period as shown in Figure 1. The supply-side reform in 2016-2018 led to continued increases in carbon black discussions, improved industry margins and accelerated capacity expansion. This resulted in a notable rise in supply during 2019-June 2020, when demand was crippled by the Covid-19 pandemic. The industry struggled to survive. From July 2020 to November 2021, carbon black discussions restored growth on the back of significant coking capacity reduction and tight coal tar supply, which strengthened the bargaining power of carbon black. Downstream tyre producers purchased on a need-to basis and the price adjustment for carbon black was relatively smooth in the year.
Figure 1 Carbon Black Price Trends in 2016-2021
Influencing Factors
1. Overcapacity and expansion boom coexist for a long time
Although China’s rubber carbon black capacity has been in excess for a long period of time, with the capacity utilization rate below 70%, producers continue with capacity expansions. Since 2017, the industry scale has been expanding, as shown in Table 1. So far, domestic rubber carbon black capacity reached 8 482 kt/a, up by 1 250 kt/a from 2017, with the growth rate at 17.28%. The situation was more obvious in 2017-2019. Capacity expansion slowed down in 2020 after the eruption of the pandemic. In 2021, 480 kt/a of new capacities were released in Qingdao, Shandong and the capacity concentration level of key enterprises elevated. The top five capacity operators together accounted for 40.2% of the domestic total, but the rate was still lower than that in the US and Japan.
2. Feedstock supply gap widens amid capacity reduction
Domestic carbon black production mostly uses high-temperature coal tar, carbon black oil, and anthracene oil as raw materials. The launch of the supply-side reform during the “13th Five-Year Plan” period imposed pressure on the carbon black industry, both from the policy side and the environmental protection side. The government strictly controlled the coking industry scale, forbade capacity additions in key regions, optimized the industry layout and regional energy supply, built up key coking industrial parks, and strictly implemented capacity replacement and support capacity reduction and replacement. Coke was fixed with steel and the coke-to-steel ratio was stipulated to reach about 0.4, and the 4.3-meter coke oven that has not passed the national access conditions was eliminated. The series of measures phased out 28 coking enterprises in Hebei, with capacities totalling 23 563 kt/a. Shandong set its coking capacities target at 44 200 kt/a in 2020 and Shanxi closed and eliminated over 20 000 kt/a of coking capacities before the heating season in 2020. Jiangsu and Henan also had the task of capacity reduction and slowed down the start-up of newly replaced capacities. Coal prices repeatedly refreshed record highs in the first half of 2021 on tight supply. Coking enterprises faced with difficulties in securing raw materials had to curtail production. Take Shandong, Shanxi and Shaanxi for instance, producers in these regions cut output due to environmental inspections. These factors all contributed to the widened supply gap of coal tar.
Although the supply of carbon black oil and anthracene oil is rising theoretically amid the expansion of coal tar deep-processing capacities, the actual increase in output is limited, as raw materials are hard to seek, which hampered producers from scaling up production. Figure 2 shows carbon black raw materials prices in 2016-2021.
Figure 2 Carbon Black Raw Materials Prices in 2016-2021
Market players favour ethylene tar in the ethylene age. However, it is hard for ethylene tar to win the dominance in the market due to limited supply and is only used as a supplement raw material of carbon black.
3. Tyre industry remains bearish in the post-pandemic era
Domestic tyre prices fell after initially rising in 2021. The price spikes of feedstock natural rubber and steel cord, as well as high carbon black prices squeezed tyre margins in the first quarter of the year. Tyre producers facing heavy cost pressure raised prices consecutively. The average run rate of domestic tyre plants was up to around 79% in March and the overall inventories were low. Entering the second quarter, tyre demand waned. Slowed sales intensified market competitions, motivating some producers to cut prices. The traditional off-season arrived in the third quarter. This, coupled with the environmental protection policies caused tyre producers to either cut or suspend production. The average run rate was capped at 50-60% from May. Figure 3 shows the operating rate of the tyre industry in 2020-2021.
Figure 3 Operating Rate of Tyre Industry in 2020-2021
As for exports, China exported 487 million pneumatic rubber tyres in the first 10 months of 2021, up by 26.8% year on year but much lower than the volume in the second half of 2020, due to surging freight costs, tight container supply, prolonged shipping cycle and delayed delivery. Pressure from domestic sales and exports prompted some domestic producers to control output. Hence, domestic output of tyre covers reached around 740 million in January-October 2021, up by 13.8% year on year and the growth rate slowed down gradually.
4. Carbon black exports need time to recover
China’s carbon black imports and exports have been in a surplus for a long time. China imports 70-100 kt of carbon black annually, mainly special carbon black, with major import origins including the US, South Korea and Japan and it exports 550-880 kt of carbon black, mainly rubber carbon black to southeast Asian countries with relatively developed rubber manufacturing industry, such as Thailand, Vietnam and Indonesia. Table 2 shows China’s carbon black imports and exports in 2017-2021.
China’s rubber carbon black industry is faced with acute surplus capacity and exports absorb around 12% of its output. The emergence of the Delta variant sounded a new alarm globally, with a severe resurgence of the pandemic in southeast Asian countries. Meanwhile, worsened chip supply crunch worldwide caused several multinational auto makers, including Toyota, Volkswagen and Ford to cut production. Elevated freight rates and short container supply also imposed pressure on exports. Therefore, China’s carbon black exports posted a month-on-month decline since March, with a most notable drop seen in September at 18.23%.
5. Stricter environmental protection restrictions weigh on carbon black
China has been strengthening environmental protection controls under the target of emission peak and carbon neutrality. In September, the second round of the fourth batch of seven central ecological and environmental protection inspection teams stationed in Jilin, Shandong, Hubei, Guangdong and Sichuan and carried out one-month inspections over two central enterprises, China Nonferrous Metal Mining (Group) and China National Gold Group. A few carbon black producers in Shandong suspended production. In October, the dual control policies about energy saving and intensity reduction caused 30-50% production cut in some parts of Jiangsu, Zhejiang, Shaanxi and Shandong and the impact is looming. In November, the Shanxi provincial government issued the notice of peak shaving production in autumn and winter in 2021-2022, with carbon black production included. According to statistics from BAIINFO, the total carbon black capacity in Shanxi stood at 1 822 kt/a and the current operating rate is around 51.1%. A few carbon black producers in Shanxi are categorized under D or C grade and some of them are operating at reduced rates, with more to cut production or carry out maintenance. In addition, the upcoming Chinese Lunar New Year holiday and the Beijing Winter Olympics in February may trigger slight declines in the average plants run rate.
Carbon Black Market Development Outlook in “14th Five-Year Plan” Period
Capacity forecast: According to statistics from BAIINFO, there are 24 domestic carbon black producers, with capacities no higher than 50 kt/a, and their capacities total 870 kt/a. Of these, 170 kt/a is likely to be phased out. In addition, a 100 kt/a carbon black unit based in Yuncheng, Shanxi may be eliminated. Hence, the capacities to be eliminated may reach around 270 kt/a. Meanwhile, around 2 985 kt/a carbon black capacities are planned or under construction. If these capacities start up as scheduled, the total capacities will amount to 11 467 kt/a, worsening the surplus situation. It is also worth noticing that the industry concentration level is increasing, which may bring about it the growing risks of small-sized rubber carbon black enterprises to be merged or elbowed out the market.
Demand forecast: Domestic tyre production is likely to be hit by a series of factors including the global supply chain disruption amid the lingering pandemic, rising costs of raw materials, logistics, energy and labour, as well as the expectations about stricter environmental inspections under China’s carbon neutrality goal. On the other hand, the chip supply crunch has triggered constant falls in domestic auto sales, especially heavy truck sales. End-user demand is bearish as a result, which makes it hard for tyre prices to be lifted. Squeezed margins may dampen tyre producers’ buying sentiment in raw materials.
Feedstock forecast: The dual control policies over energy consumption and intensity are slowing down the new capacity release of coking enterprises. While the rapid capacity expansion at downstream deep-processing and carbon black industries may further widen the supply-demand gap of coal tar. This may make it easier for negotiating prices of coal tar to rise. In terms of anthracene oil hydrogenation, competition with anthracene oil is basically negligible. Carbon black is the leader, and anthracene oil closely follows the pace of coal tar. Carbon black oil supply may rely on the movements of the coal pitch market. Ethylene car supply is expected to rise with the release of new ethylene capacities and its proportion in feedstock of carbon black may increase accordingly. Overall feedstock costs of carbon black are likely to stay at relatively high levels in the medium to longer term.
To sum up, China’s carbon black industry is still in expansion, but the capacity utilization rate has limited room to increase amid the dual control over energy consumption and intensity. Meanwhile, feedstock costs may hover high in the medium to longer term, which may offer the incentive to cargo-holders for price hikes. However, expected limited demand pick-up may send the carbon black prices in a reversed “v” trend in the medium term.
